State should not be forcing districts to spend down their budget reserves

June 12, 2014

Vernon Billy and Wes Smith / commentary

Vernon Billy and Wes Smith / commentary

June 12, 2014

The governor and Legislature are preparing to approve budget language that severely limits the amount of funding school districts can maintain in their local reserves for economic uncertainties.

Both the Association of California School Administrators and California School Boards Association, representing superintendents, school boards and county boards of education, vehemently oppose this fiscally irresponsible proposal, as it is inconsistent with the principle of subsidiarity – a key principle of the state’s new Local Control Funding Formula. It also discounts the critical role that prudent budget reserves play in the ability of local educational agencies to maintain education programs during economic downturns.

Education is not solely a “state” program. It is governed, administered and provided by local school districts with locally elected governing boards and community engagement.

Should voters approve the State Rainy Day Fund ballot measure (Assembly Constitutional Amendment 1 or ACA 1) in November, school districts would be forced to spend down excess reserves whenever the state deposits money into its own state-level school reserve. The intrusive requirement would effectively impose an absolute cap of twice the state minimum standard of 3 percent that nearly every school district would be allowed to maintain for economic uncertainties.

Wes Smith

The proposal is fiscally irresponsible.

To enact these provisions is fiscally irresponsible and in conflict with the principles articulated by the Legislature in placing ACA 1 on the ballot. For most of the last two decades, California worked to prevent school district bankruptcies by enacting laws requiring multiyear projections, enforcement of strict fiscal standards by county offices of education, early intervention, and even the authority to override the spending decisions of local governing boards. It is therefore ironic that, at the very time an initiative has been placed on the statewide ballot to strengthen the state’s rainy day fund, the Legislature would consider statutory changes eviscerating provisions at the local school district level that are based on the same premise of fiscal prudence and responsibility. The creation of a state Proposition 98 reserve does not eliminate the need for prudent local reserves.

The proposal fails to recognize the critical role that prudent budget reserves play in the ability of school districts to maintain fiscal solvency.

For most districts, a 3 percent reserve requirement represents only six to eight days of payroll. This proposal would allow for a 6 percent reserve, which equals three weeks of payroll. Districts at the minimum level of reserves are vulnerable to any unanticipated financial developments, such as those currently facing districts in the form of increased contributions to CalSTRS and CalPERS, and rising healthcare costs due to the Affordable Care Act.

The governor’s proposed increases in CalSTRS alone will phase in higher employer contribution rates for the next seven years: going from 8 percent to 19 percent, equating to $60 per pupil starting in the 2014-15 fiscal year. This is more than the increased level of funding many districts will receive via the new funding formula and will have major implications as boards are finalizing budgets and LCAPs. With last-minute surprises like this, it is essential that districts have tools at their disposal to effectively manage their budgets in the short and long term.

The proposal ignores recent history

Simply put, many school districts were able to survive the great recession only through prudent management of budget reserves. Prudent reserves allowed districts to avoid having to make even greater cuts to educational programs and reductions to certificated and classified staff due to budget reductions and deferrals.

This year the governor and the leaders of the Senate and Assembly have eloquently articulated the need for California to strengthen its rainy day fund. As they have all noted, California revenues are volatile and, in many years, uncertain. Those uncertainties inevitably trickle down to school districts, and it is unclear why the state would propose a reserve policy for school districts that is entirely counter to the one being considered for the state.

Last, we object to the process by which this language is being considered. This language was not proposed in the governor’s January budget or the May Revision, and has not been discussed in any public hearing in either legislative house. The proposed language represents a permanent, significant fiscal and policy shift in education finance which should be publicly vetted before the language is voted on by the Legislature.

…

Vernon Billy is the CEO and Executive Director of the California School Boards Association. Wes Smith is the Executive Director of the Association of California School Administrators.

EdSource welcomes commentaries representing diverse points of view. The opinions expressed in this commentary represent those of the authors. If you would like to submit a commentary for EdSource Today, please contact us.

RP2 years ago2 years ago

This clearly needs more public debate. And, the fact that it was a last minute addition to the budget is reprehensible. But most of us have come to expect such things from Sacramento.
I would have a very difficult time justifying a reserve of 100%, or even 50%, unless in the case of a very small district. As a taxpayer, the concept of using education dollars as quickly as possible makes complete … Read More

This clearly needs more public debate. And, the fact that it was a last minute addition to the budget is reprehensible. But most of us have come to expect such things from Sacramento.

I would have a very difficult time justifying a reserve of 100%, or even 50%, unless in the case of a very small district. As a taxpayer, the concept of using education dollars as quickly as possible makes complete sense. But given the funding gyrations in recent years, setting a maximum reserve of double or triple the minimum is simply ridiculous. Given the recent past, a 20% reserve cap would seem reasonable, with, say, a five year phase in and using a rolling three year average.

To be required to spend down sometimes sizable reserves within a one year period is certainly not going to yield the optimal benefit to education, nor use of our tax dollars. To force local school districts would cause decisions to be made with no more foresight than our leaders in Sacramento. We can do better.

Jennifer Bestor2 years ago2 years ago

The State actually recommends 17% or two months (see guidance letter from September 2011 at http://www.cde.ca.gov/fg/ac/co/gasb54atthd.asp), which is quite close to the 20% you (and others) suggest as a reasonable contingency set-aside.
This law would require 6% (three weeks) or less for school districts educating 95% of California's children.
The reduction of total reserves to around $3 billion statewide would have left districts completely incapable of withstanding the $8 billion of deferrals they were tossed … Read More

The State actually recommends 17% or two months (see guidance letter from September 2011 at http://www.cde.ca.gov/fg/ac/co/gasb54atthd.asp), which is quite close to the 20% you (and others) suggest as a reasonable contingency set-aside.

This law would require 6% (three weeks) or less for school districts educating 95% of California’s children.

The reduction of total reserves to around $3 billion statewide would have left districts completely incapable of withstanding the $8 billion of deferrals they were tossed in 2011-12 — and from which they wouldn’t have been rescued without passage of Prop 30.

S Nelson2 years ago2 years ago

What is an excessive maximum reserves in this new era of school funding? My district had been ramping up to 7X the minimum (up toward 21%). Under past funding uncertainties - this made sense for a basic aid district that kept out of both layoffs and decreased teaching days. Does 7X the minimum make sense now? I think not - we still have pretty of "non-proficient" target (LCAP) students graduating from our … Read More

What is an excessive maximum reserves in this new era of school funding? My district had been ramping up to 7X the minimum (up toward 21%). Under past funding uncertainties – this made sense for a basic aid district that kept out of both layoffs and decreased teaching days. Does 7X the minimum make sense now? I think not – we still have pretty of “non-proficient” target (LCAP) students graduating from our district.
There is a cost called “lost opportunity costs.” Money (in my district millions), that is not spent on prudent education efforts, for current students, is a Non Performing Asset. That’s a shame for a Public Asset. As a board member – I’d rather the administration not have too many unexplained squirrel holes. CSBA does not speak for me on this issue.

Jennifer Bestor2 years ago2 years ago

Just under two years ago (June 2012) the State ended the fiscal year having withheld 39% of all its state aid for revenue-limit funding from its K-12 schools. In two districts serving my town, this meant 39% of ALL revenue-limit funding, since the state had taken ALL their property tax to fund its VLF reduction and economic recovery bonds.
One of these districts (still) had reserves and was able to handle the situation … Read More

Just under two years ago (June 2012) the State ended the fiscal year having withheld 39% of all its state aid for revenue-limit funding from its K-12 schools. In two districts serving my town, this meant 39% of ALL revenue-limit funding, since the state had taken ALL their property tax to fund its VLF reduction and economic recovery bonds.

One of these districts (still) had reserves and was able to handle the situation with only limited program cutbacks. The other district did not and had to cut back staff, instruction days, and other key services. (Remember, in June 2012 — less than two years ago — there was NO guarantee that Prop 30 [or 38] would pass and that deferrals would ever be paid down.)

In that month, the state deferred over 20% of overall school funding (categoricals on top of revenue-limit funding). 21% doesn’t sound imprudent, in light of the state’s all-to-recent behavior.

What does sound imprudent is that, the minute the state puts $1 in its Public School System Stabilization Account, every school district in the state has squeeze its reserves down to 2% (LAUSD – less than a week of operating expenditures) or 6% (everyone else – less than three weeks’ expenses).

Looking at past history, this would have meant that, at the height of the dot.com boom, every school district would have had to strip itself of reserves (think BOOM atop BOOM) … and, when the bust came, they’d all be looking at less than a third of what they needed to protect them from the depredations to come.

Dan Walters says this change was at “the bidding of the powerful California Teachers Association …” and below GeorgeHuff points out what happens when a sudden infusion of cash occurs (“one-time grants” to employees, rather than replacing attrition or reinstating programs). I wish I could understand what teachers will get out of this, since students and schools will only get a steeper, faster roller-coaster ride down in each bust.

GeorgeHuff2 years ago2 years ago

This is about Transparency, not about forcing districts to be negligent!
The state is also representative of taxpayers, and, as such, needs more data than it has, if it is going to engage in realistic planning.
One district in southern CA had so much in reserves, that, at the beginning of this school year, it quickly dispersed one-time grants to its employees. Yet, this same district had not replaced some teachers lost through attrition - e.g. … Read More

This is about Transparency, not about forcing districts to be negligent!
The state is also representative of taxpayers, and, as such, needs more data than it has, if it is going to engage in realistic planning.

One district in southern CA had so much in reserves, that, at the beginning of this school year, it quickly dispersed one-time grants to its employees. Yet, this same district had not replaced some teachers lost through attrition – e.g. arts teachers were cut by 50%, and adult ed was almost eliminated completely. That was educationally negligent and indefensible. Same district some years ago, the union researchers discovered, under an inappropriate-sounding agenda item, what appeared as obscene raises for the top administrators, while middle management, principals, had settled for a tiny raise, and the teachers were being told that there just wasn’t enough money for them. There have been other sightings of misspent, or hoarding, of school district money.

The state offers transparency of taxpayer-subsidized salaries for individual City Councils and city offices. The state does not offer a comparable public data for public school officials, or even comparable salaries for school board members. This trailer is a beginning, to enable some sunshine. What would be next? Charters, tax-supported, of course. It’s likely that the current opposition is being fed by the financiers of these schools.

Frank Lee2 years ago2 years ago

This commentary characterizes the reserve requirement without factually or accurately describing it. There are two requirements. First, districts that want to maintain a reserve in excess of the required reserve must simply explain why. This is simple transparency and does NOT limit how big the reserve can be. Second, in the year after the state transfers money to the Prop 98 reserve (and ONLY in those years) the district reserve can … Read More

This commentary characterizes the reserve requirement without factually or accurately describing it. There are two requirements. First, districts that want to maintain a reserve in excess of the required reserve must simply explain why. This is simple transparency and does NOT limit how big the reserve can be. Second, in the year after the state transfers money to the Prop 98 reserve (and ONLY in those years) the district reserve can be no more than 2 or 3 times the required reserve. Even that requirement, however, can be waived. Can anyone explain how this “severely limits” the size of local reserves?

Jennifer Bestor2 years ago2 years ago

It would be reasonable to wonder if this measure was written by TRAN/bond underwriters.
Next year, the state will take $8.4 billion out of school-allocated property taxes to satisfy its own bond and VLF swap obligations. In seven of the past ten years -- including the current one -- it has failed to repay that money on time, forcing schools to serve as its interest-free lenders.
Districts like Redwood City Elementary had ALL of … Read More

It would be reasonable to wonder if this measure was written by TRAN/bond underwriters.

Next year, the state will take $8.4 billion out of school-allocated property taxes to satisfy its own bond and VLF swap obligations. In seven of the past ten years — including the current one — it has failed to repay that money on time, forcing schools to serve as its interest-free lenders.

Districts like Redwood City Elementary had ALL of their property tax removed, then were handed deferrals of over 50% of revenue-limit funding, a challenge that RCSD was only able to manage due to prudent reserves. Had RCSD not had these reserves, the State’s own fiscal disorder would have thrown it into the arms of the moneylenders, as many poorer and less well-managed districts were.

Is that the goal? To squeeze school districts to spend every penny they can (presumably to show short-term ‘results’ from LCFF/Prop 30 to the taxpaying, voting public) — then throw schools back under the financial bus, raise more taxes AND pay bigger bonuses to more bond salesmen?

Honestly, one starts to wonder what local control really means.

el2 years ago2 years ago

Before a proposal like this becomes law, I'd like to see the state get more stability in its budget and budget projections. This is especially important for smaller districts, where 3% is not necessarily all that much raw cash. The uncertainty in state funding for our district over the past few years was close to about 10% of the total budget in some situations. Add that to volatile enrollment numbers and the numbers can … Read More

Before a proposal like this becomes law, I’d like to see the state get more stability in its budget and budget projections. This is especially important for smaller districts, where 3% is not necessarily all that much raw cash. The uncertainty in state funding for our district over the past few years was close to about 10% of the total budget in some situations. Add that to volatile enrollment numbers and the numbers can shift very fast in either direction.

10% is basically one month of expenses. Our district was sure glad to have more than 3% in hand when the state was a year behind in payments. Having to call Sacramento for a cash flow loan isn’t the same thing as having it right in your own accounts, and one can imagine, if not a state emergency, another federal situation where Title 1 money didn’t flow when it was supposed to, etc.

Maybe this is good policy. Or maybe a cap at a different percentage would be appropriate. But if so, it should be thoroughly debated and analyzed and understood as to how it will affect ALL districts, not just the ones familiar to the lawmakers.

OCTeacher2 years ago2 years ago

When the state funds an education "Rainy Day Fund," our school districts will not need a redundant and excessive reserve. The proposed cap agrees that a local reserve is prudent. In fact the cap would permit double the reasonable and customary 3% standard.
In 2012-13 the average school district reserve statewide was 30.34%.
Over 25 small districts had reserves of from 100-200%.
Eighty-five medium-sized unified school districts had reserves of over 50, 75 districts over 40%, 370 … Read More

When the state funds an education “Rainy Day Fund,” our school districts will not need a redundant and excessive reserve. The proposed cap agrees that a local reserve is prudent. In fact the cap would permit double the reasonable and customary 3% standard.

In 2012-13 the average school district reserve statewide was 30.34%.
Over 25 small districts had reserves of from 100-200%.
Eighty-five medium-sized unified school districts had reserves of over 50, 75 districts over 40%, 370 districts held on to 20% of their funding while 140 districts kept 15% in reserve.

Our schools have gone through six years of severe cuts. We need to refurbish dilapidated buildings,replace old vehicles and furniture, lower class sizes, return many programs that have disappeared – especially the arts and career technical education.

Taxpayer dollars should be spent on expanding educational opportunities for our students to the benefit of our families, communities and state. School districts shouldn’t be savings institutions, especially when the state is setting up an educational reserve.

John Hearst2 years ago2 years ago

"For most districts, a 3 percent reserve requirement represents only six to eight days of payroll. This proposal would allow for a 6 percent reserve, which equals three weeks of payroll. Districts at the minimum level of reserves are vulnerable to any unanticipated financial developments, such as those currently facing districts in the form of increased contributions to CalSTRS and CalPERS, and rising healthcare costs due to the Affordable Care Act."
This is a red herring. … Read More

“For most districts, a 3 percent reserve requirement represents only six to eight days of payroll. This proposal would allow for a 6 percent reserve, which equals three weeks of payroll. Districts at the minimum level of reserves are vulnerable to any unanticipated financial developments, such as those currently facing districts in the form of increased contributions to CalSTRS and CalPERS, and rising healthcare costs due to the Affordable Care Act.”

This is a red herring. District reserves are for UNFORESEEN expenses or an unforeseen cut in state funding — not for routine yearly changes.

Increased contributions to STRS and PERS will be clearly laid out years beforehand and the rules will not change during a fiscal year.

ACA made some changes regarding mandated inclusions that took effect in 2012-2014. There were some marginal increases. The issues are largely settled. If anything, the option of health exchanges may pose huge cost-saving options during labor negotiations. Also, districts get their health care pricing in late spring and can budget appropriately. There are no mid-year surprises that require a raid on a budget reserve.

On the district income side, if the state is going to have a rainy day fund which CAN be tapped in an emergency, it only stands to reason that the districts should have a commensurate reduction in the size of its own rainy day fund. As a taxpayer, I don’t want to effectively double the amount of reserves by having two separate reserve systems.

As a taxpayer, I don’t want my money sitting in district reserves unproductively. Some districts are keeping as much as a 100% reserve. That is absurd. There has to be some standardization, and 6% is twice as much as many accountants recommend.

John L2 years ago2 years ago

I agree.

Larry Teixeira2 years ago2 years ago

Mr. Hearst:
You state that "increases to STRS & PERS will be clearly laid out years beforehand..." Were you unconscious just one month ago when the Gov. added over one percent to the amount employers must pay into STRS, with no prior notice? That is going to cost my small District $400,000 per year, and we first heard about it six weeks before the start of the new year.
Surely you can't be so naive … Read More

Mr. Hearst:

You state that “increases to STRS & PERS will be clearly laid out years beforehand…” Were you unconscious just one month ago when the Gov. added over one percent to the amount employers must pay into STRS, with no prior notice? That is going to cost my small District $400,000 per year, and we first heard about it six weeks before the start of the new year.

Surely you can’t be so naive as to believe the Governor and the Legislature will not, just as they are doing right now, drop some new expense on school districts two weeks before the start of our fiscal year. Secondly, do you really believe that this Legislature is going to fund a state reserve and not raid it within weeks? Really?